Global M&A Series. A Guide to Takeovers in the UK

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Adela Parsons
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1 Global M&A Series A Guide to Takeovers in the UK

2 A Leading Global M&A Practice We have a leading, global M&A practice regularly featured at the top of cross-border M&A league tables. Our M&A experts advise on the full range of public and private transactions from complex multi-billion pound cross-border deals to strategic joint ventures. We regularly advise on public takeovers and mergers, major divestments, acquisitions by auction and demergers. Our clients are among the world s leading companies including more than half of the Global Fortune 500. These businesses range across all industries from energy & resources through to healthcare. We have a particularly strong track record in the financial services sector, regularly advising banks and insurance companies on their own account M&A transactions. We advise on strategic corporate and M&A work, both domestic and international, with a particular focus on large, complex, cross-border transactions. We consistently win some of the most high profile and high value deals in the market. We use our intellectual capital to create value for clients and are leading the way on informing the market on the issues impacting global M&A. Last year, we released our second global M&A research report on European M&A and our Global M&A Toolkit comprises a growing collection of web-based tools and in-depth analysis. Our Insights into M&A Trends Global Dynamics is a regular publication for clients focusing on trends impacting global M&A activity. 2

3 Foreword I am very pleased to be publishing our updated Guide to Takeovers in the UK, a key constituent of the Clifford Chance Global M&A Series. There has been a welcome increase in the volume of takeover transactions recently as corporates and other investors around the world seek out opportunities for improved growth and returns. This updated Guide reflects all of the changes to the UK Takeover Code since September 2011 including the removal of the residency test for UK-based AIM companies, the extension of information rights to target pension scheme trustees and the recent reform to the UK competition regime as well as reflecting changes in market practice. In addition, the Guide incorporates the latest changes to the Listing Rules aimed at improving minority shareholder protection. An increasing proportion of global M&A activity has a cross-border element. The Guide to Takeovers in the UK is one of a suite of guides to takeover regimes in various jurisdictions across the globe. These can be accessed via our Global M&A Toolkit. I hope that our Guide to Takeovers in the UK will assist you when you are investigating or executing a UK public M&A transaction, whether you are already familiar with the UK regime or looking at it for the first time. Guy Norman Global Head of Corporate Clifford Chance LLP A Guide to Takeovers in the UK, Clifford Chance LLP 3

4 Introduction This Guide provides an overview of takeovers of public companies (whether listed or otherwise) in the UK, including acquiring a stake in a UK public company and launching (or defending) a formal takeover bid. It considers, from both a legal and regulatory perspective, the various stages of a takeover from planning a bid through to achieving control of the target. It offers clear explanations on key issues including pre-bid planning (Section 2), implementing a takeover by scheme of arrangement (Section 3), competition clearances (Section 4) and stakebuilding before an offer (Section 5). The Guide covers the making of an offer (Section 7), defence tactics on a hostile bid (Section 8), events following a successful offer and consequences of an unsuccessful offer (Sections 8 and 9 respectively), issues arising on MBOs and similar transactions (Section 11) and the impact of US securities laws on takeovers of UK public companies (Section 12). It does not, however, consider any tax or accounting implications of a takeover or the impact of securities laws of other jurisdictions where the target has shareholders resident outside the UK or US. Definitions of words and expressions used are contained in the Glossary at the end of the Guide. This Guide does not purport to be comprehensive or to render legal advice. The position stated is as at July This Guide has been produced by the Global Corporate Practice and substantially written by Sharon Jenman. Copyright Clifford Chance LLP: 2014 All rights reserved

5 List of Tables/Diagrams Summary of the General Principles of the Code 3 Announcement requirements 9 Indicative announcement and PUSU timeline 11 Break fees and other deal protection measures 15 Implications of acting in concert with a bidder 21 Cancellation scheme 25 Transfer scheme 26 Indicative cancellation scheme timeline 27 EU Merger Regulation thresholds 33 Summary of legal and regulatory implications of interests in UK companies at various percentage levels 48 Indicative offer timeline 54 Comparative table of principal documents involved in recommended and hostile bids 60 Bid document content requirements 61 Defence document content requirements 72 Application of US federal securities laws to a contractual offer 93 Application of US federal securities laws to a takeover effected by scheme 96 A Guide to Takeovers in the UK, Clifford Chance LLP 5

6 Contents 1. Overview of regulatory framework 1 2. Pre-bid planning 6 3. Schemes of arrangement Competition Acquiring a strategic stake before a bid Acquiring control Making a bid The defence Declaring the offer unconditional and completing the acquisition Consequences of an unsuccessful bid MBOs and similar transactions Application of US federal securities law to UK takeovers 87 Glossary 98 Index 100

7 1. Overview of regulatory framework 1.1 Regulation of takeovers Statutory and regulatory provisions affecting takeovers Pensions legislation 5 A Guide to Takeovers in the UK, Clifford Chance LLP 1

8 Section 1: Overview of regulatory framework 1.1 Regulation of takeovers Regulatory framework The Takeover Code (Code) provides the main framework regulating the conduct of takeover and merger transactions in the UK. The Code applies to takeovers of companies that have their registered office in the UK, Channel Islands or Isle of Man, and have their securities admitted to a UK regulated market (for example, the London Stock Exchange s main market for listed securities or the ISDX Main Board) or a UK multilateral trading facility (for example, AIM or the ISDX Growth Market) or on any stock exchange in the Channel Islands or Isle of Man. It also applies to takeovers of untraded public companies which are resident in the UK, the Channel Islands or the Isle of Man and takeovers of certain private companies having public company characteristics. The Code applies to takeover and merger transactions, however they are effected, including by way of a contractual offer, statutory merger or Court-approved scheme of arrangement, as well as other transactions which may effect a change or consolidation of control of the relevant Code company. The Code is drafted from the perspective of a contractual offer but contains a schemes appendix (Appendix 7 to the Code), which sets out the adaptations which apply on a takeover implemented by scheme. This Guide therefore describes the process on a contractual offer with commentary as necessary in relation to takeovers implemented by scheme. In recent years, schemes have been used increasingly often to effect Code transactions; the majority of recent high value bids used a scheme structure. Section 3 describes the scheme process Shared jurisdiction Certain provisions of the Code may apply to other companies in limited circumstances. Where a company is incorporated in another EEA member state and its securities are traded in the UK (or vice versa) the Panel may, in certain circumstances, share jurisdiction over takeovers of such companies with the regulator in the other member state. The shared jurisdiction requirements, which were introduced by the Takeovers Directive, are complex and early consultation with both sets of regulators on relevant transactions is essential The Panel The Code is issued and administered by the Panel on Takeovers and Mergers. The Panel s membership is drawn from the various regulatory and professional bodies involved in the field of takeovers, as well as representatives from British industry. The Code and the Panel operate principally to ensure that target shareholders are treated fairly and are not denied an opportunity to decide on the merits of a takeover and that target shareholders of the same class are afforded equivalent treatment. The Code also aims to provide an orderly framework for the conduct of takeovers. The Panel is not concerned with the financial or commercial merits of a takeover or with competition issues nor is it the purpose of the Code to facilitate or impede the making of takeovers. 2 A Guide to Takeovers in the UK, Clifford Chance LLP

9 Section 1: Overview of regulatory framework Panel Executive The day-to-day functions of the Panel are carried out by the Panel Executive which comprises both permanent and seconded staff. This arrangement ensures both continuity of approach and up-to-date experience of current takeover practices Hearings Committee The Hearings Committee s principal function is to review rulings of the Executive. If a party is dissatisfied with a ruling of the Panel Executive, it can appeal to the Hearings Committee. The appeal is usually heard in the presence of all parties. The Hearings Committee also hears disciplinary proceedings instigated by the Panel Executive when there has been a breach of the Code The Takeover Appeal Board The Takeover Appeal Board is an independent body, which hears appeals against rulings of the Hearings Committee. Any party to a hearing before the Hearings Committee may appeal to the Takeover Appeal Board against a ruling of the Hearings Committee or the chairman of the hearing General Principles The Code consists of 6 General Principles, which are essentially statements of good commercial practice, and 38 Rules which amplify the General Principles and govern specific aspects of takeover procedure. The fundamental cornerstone of the Code is that all shareholders of the same class should be afforded equivalent treatment (General Principle 1). Summary of the General Principles of the Code 1. All holders of the securities of a target company of the same class must be afforded equivalent treatment; moreover, if a person acquires control of a company, the other holders of securities must be protected. 2. The holders of the securities of a target company must have sufficient time and information to enable them to reach a properly informed decision on the bid; where it advises the holders of securities, the board of the target company must give its views on the effects of implementation of the bid on employment, conditions of employment and the locations of the company s places of business. 3. The board of a target company must act in the interests of the company as a whole and must not deny the holders of securities the opportunity to decide on the merits of the bid. 4. False markets must not be created in the securities of the target company, of the bidder company or of any other company concerned by the bid in such a way that the rise or fall of the prices of the securities becomes artificial and the normal functioning of the markets is distorted. 5. A bidder must announce a bid only after ensuring that he/she can fulfil in full any cash consideration, if such is offered, and after taking all reasonable measures to secure the implementation of any other type of consideration. 6. A target company must not be hindered in the conduct of its affairs for longer than is reasonable by a bid for its securities. A Guide to Takeovers in the UK, Clifford Chance LLP 3

10 Section 1: Overview of regulatory framework Enforcement of the Code The Panel has a range of statutory enforcement powers and sanctions, including the power to require disclosure to it of documents and information, the ability to require compensation to be paid to target shareholders and the power to seek enforcement orders from the Courts. These statutory enforcement powers and sanctions were introduced as a result of implementation of the Takeovers Directive. The Panel has indicated that it does not anticipate exercising these powers, preferring to rely on the sanctions employed since its inception in 1968, including public or private criticism and public censure. The Financial Conduct Authority (FCA) supports the functions of the Panel by providing in its Handbook that a regulated firm must not act, or continue to act, for any person in connection with a transaction to which the Code applies if the firm has reasonable grounds for believing that the person in question is not complying or is not likely to comply with the Code (known as the cold shoulder principle). This principle reinforces the powers and sanctions of the Panel and, accordingly, anyone seeking to take advantage of the facilities of the securities markets in the UK should comply with the Code and the rulings of the Panel. Responsibility for compliance with the Code lies with the directors of both the bidder and the target, as well as their professional advisers Spirit and letter of the Code The Code itself acknowledges that it is impracticable to devise rules in sufficient detail to cover all the circumstances which can arise on takeovers. Accordingly, the General Principles and Rules are interpreted by the Panel in accordance with their spirit, as well as their precise wording, to achieve their underlying purpose. The system is designed to ensure flexibility, as the Rules can be (and frequently are) extended to cover situations not explicitly covered by the Code or can be relaxed in appropriate circumstances Timely consultation The efficiency of the system relies very much on timely consultation with the Panel, both before and during a bid, to enable the Panel to provide expertise and to arbitrate informally. Parties are encouraged to consult the Panel (normally via their advisers) in the event of any doubt as to the interpretation or application of the Code, as only the Panel can give a definitive ruling on the Code. The Panel will also intervene in a bid on its own initiative if it considers that shareholders interests require it to do so or that a breach of the Code may arise. 1.2 Statutory and regulatory provisions affecting takeovers A number of statutory and regulatory provisions impact upon the bid process. The Companies Act 2006 provides the statutory underpinning for the Code and the regulatory activities of the Panel. It contains the statutory procedure applying to a scheme 4 A Guide to Takeovers in the UK, Clifford Chance LLP

11 Section 1: Overview of regulatory framework of arrangement (see section 3) and for squeeze-out of the minority (and the right of the minority to be bought out) following a contractual offer once the bidder has acquired 90% of the target s shares (see section 9.3). The Companies Act 2006 also contains the bid documentation offence (see section 7.1.7). This Guide briefly covers these statutory provisions and their interaction with the Code. It also refers to the Listing Rules, which will be relevant where either the bidder or the target is a listed company, the Disclosure Rules and Transparency Rules (DTRs), which will be relevant where either company s securities are traded on the London Stock Exchange s main market for listed securities, the ISDX Main Board, AIM or the ISDX Growth Market, and the Prospectus Rules, which will be relevant in the context of a securities exchange offer. 1.3 Pensions legislation Pensions legislation is a further area which may impact upon takeover transactions. The provisions of the Pensions Act 2004 increase the risks associated with the acquisition of companies with defined benefit (final salary) pension schemes. The moral hazard provisions allow the Pensions Regulator, in certain circumstances, to impose financial obligations on parties connected or associated with an employer operating a scheme in deficit. It is possible (and in some cases advisable) to seek a clearance statement from the Pensions Regulator in advance of a proposed transaction that, effectively, it would not be reasonable for the Pensions Regulator to use its powers to pursue the parties (or those associated or connected with them) for further pension scheme funding in the context of the transaction. It is not, however, possible to make receipt of such a clearance statement a condition of the offer. The Pensions Regulator has indicated that parties should consider seeking clearance regardless of the relevant scheme s funding position, where there is a significant weakening of employer covenant as a result of a corporate transaction. This is likely to be the case in most leveraged deals. Pension issues must, therefore, be identified, and discussions held with the Pensions Regulator, and/or the trustees of the relevant schemes as appropriate, at an early stage of the transaction. A Guide to Takeovers in the UK, Clifford Chance LLP 5

TABLE OF CONTENTS Section Heading Page

TABLE OF CONTENTS Section Heading Page PART I KEY POINTS TO REMEMBER... 2 PART II INTRODUCTION TO TAKEOVERS IN THE UK... 3 1. THE TAKEOVER CODE AND THE PANEL... 3 2. GENERAL PRINCIPLES... 3 3. PRELIMINARY